5 Factors That Decide Your Credit Score
Credit scores range between 200 and 800. Scores above 620 are considered desirable for obtaining a mortgage. These factors will affect your score.
- Your payment history. Whether you paid credit card obligations on time.
- How much you owe. Owing a great deal of money on numerous accounts can indicate that you are overextended.
- The length of your credit history. In general, the longer the better.
- How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay promptly.
- The types of credit you use. Generally, it’s desirable to have more than one type of credit—installment loans, credit cards, and a mortgage, for example.
For more on evaluating and understanding your credit score, go to http://www.myfico.com.
How to start:
- Get a credit cardThis is easily the quickest and most effective way to start a credit profile. But if a regular credit card won’t be issued to you because you have no credit, you may want to try to get a secured credit card. A secured credit card is a type of credit card secured by a deposit account (like a CD) owned by the cardholder. The cardholder of a secured credit card is still expected to make regular payments, as with a regular credit card, but should they default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows building a positive credit history.
- Use credit cards wisely A credit card opens all kinds of ways to damage your score. Never miss a payment. Pay in full if you can. If you must carry a balance it won’t hurt you unless your balance is relatively large. Never charge more than 30% of your credit limit and preferably keep it closer to 10%. And don’t apply for more than one card at once or with any frequency.
- Get another form of credit Having different kinds of debt helps your score. So an auto loan or personal loan or some other installment debt can help. It may even help to have a second but different kind of card, like a gas card or department store card. In some cases, buying furniture or an appliance on monthly terms can help. But always ask if the finance company reports to the credit bureaus. AND keep the cards at a minimum. It’s easy to become credit card poor and the more cards not only give you credit, but it they could give you poor credit.
- ALWAYS pay all bills on time If you live off campus, paying any utility or cable bill or even the monthly plan for a new desk or TV is a must. It won’t do much to build your score. But if you slack off and get referred to a collection firm it’s a major ding on your score. However, you will want the utilities in your name – if you pay a roommate for the utilities, that only helps their credit.
- Don’t close an unused card account This is counter intuitive. Canceling a card can lower your score because it leaves you with less overall credit and instantly raises the percentage of debt capacity you are using. A long credit history is part of what makes for a high credit score. So keep those older accounts and make sure they are in good standing.
Other things that help you build credit:
- Opening a checking account and using your debit card
- Building a savings account
- Having you name on your own cell phone account.
How to keep Your Good Credit Score:
DON’T EVER CANCEL A CREDIT CARD!!! It will actually damage your credit, if you cancel cards – it’s okay to let it sit out there. Or charge just enough you can pay off per month to keep you credit clean.
If any of your debt went to collections, it will definitely lower your score. One train of thought is to reduce your amounts on your accounts that aren’t delinquent and then work on your delinquent account. It isn’t going to go away by ignoring it.
If you take advantage of your annual free credit score report, you may find there are mistakes on your report – past bills you actually paid off, or entries that actually aren’t yours. If these things show up on your credit report, even if they are yours or not, and they will lower your score. It is very important to correct these mistakes to increase your score! But it may take a while to get correct it.
If you have some dings on your credit report which results from bankruptcies, short sales or foreclosures, these will stay with you up to 7 years. Start fresh – stay on top of current payments and when you do secure any debt, keep it current or pay it off.
If you HAD a history of late or slow payments, but have been current for a couple years, lenders will look more at the recent history than what happened in the past.
How to Keep Your Credit Score Pristine Once You Apply for a Mortgage:
- Don’t make large purchases. When you are buying a home you are going to be bringing in new debt. However, after applying for a home don’t go out and buy a new car or furniture, this could raise you debt ratio and make it riskier for the loan company to lend to you. Sometimes after doing this, the previously qualified buyer is no longer able to qualify.
- Do Not Change your bank accounts. If you have had an account for a while it is easier foe lenders to track and source your assets. Before you even think to transfer money from one account to the other you should talk with you loan officer.
- Do not deposit cash into your bank account. Cash is not very traceable and lenders need to be able to source your income. Small deposits, which can be explained, are fine, but getting a large lump sum as a gift is not. Discuss the right way of tracking your assets with your loan officer.
- Don’t co-sign other loans for anyone. Once you have co-signed on a loan you are now obligated to that loan. With the obligation comes a higher ratio. Lenders will be counting the payment against you even if you tell them you won’t be.
- Don’t close any credit accounts. Many clients believe that by closing out credit accounts makes them less risky and that they will have a better chance of being approved for the loan. This is INCORRECT. The majority of your score is the length and depth of your credit history. Closing these accounts can have a negative impact on your credit score.
- Do not apply for new credit accounts. Whether it is a new car or a credit card once you have your credit run by multiple financial companies, this effects your FICO score. Your interest rate is based on your credit score. The lower the score the higher the rate or you may not be eligible for the loan.
When deciding to apply for a mortgage make sure you talk with your loan officer before you decide to do anything else financially. Any change in income, assets, or credit will need to be reviewed and all decisions will need to be made in a way to keep your application in the best light.
8 Ways to Improve Your Credit
Credit scores, along with your overall income and debt, are a big factor in determining if you’ll qualify for a loan and what loan terms you’ll be able to qualify for.
- Check for and correct errors in your credit report. Mistakes happen, and you could be paying for someone else’s poor financial management.
- Pay down credit card bills. If possible, pay off the entire balance every month. However, transferring credit card debt from one card to another could lower your score.
- Don’t charge your credit cards to the maximum limit.
- Wait 12 months after credit difficulties to apply for a mortgage. You’re penalized less for problems after a year.
- Don’t shop for mortgage rates all at once. Too many credit applications can lower your score, but multiple inquiries from the same type of lender are counted as one inquiry if submitted over a short period of time.
- Avoid finance companies. Even if you pay the loan on time, the interest is high and it will probably be considered a sign of poor credit management.
This information is copyrighted by the Fannie Mae Foundation and is used with permission of the Fannie Mae Foundation. To obtain a complete copy of the publication, “Knowing and Understanding Your Credit,” visit http://www.homebuyingguide.org.
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